Is Now The Time To Buy The Banks?

It’s no secret that Australia’s banks are facing tough economic conditions. Faced with higher funding costs and decreased profitability, we are told action is needed to ensure Australia’s ‘Big-Four’ remain profitable. But is this really the case? Should investors who either own shares or who are looking to buy in the near future be concerned? I think not.

If Australia’s banks weren’t taking steps to ensure profitability, one might be inclined to worry. Considering the amount of negative media attention, one could be forgiven for thinking the banks were close to bankruptcy! Despite this horrendous media publicity, Australia’s banks continue to make exceptional profits.

The above figures - taken from HUBB’s Integrated Investor Suite - show ANZ earnings in 2011 approaching pre-GFC records. Dividend payments in this period actually exceeded 2007 levels - hardly a sign of difficult times for Australia’s dominant financial players.

Recent media hype suggests tough times ahead, for ANZ in particular. ANZ announced it would be cutting 1000 staff in 2012, citing higher funding costs impacting their ability to turn a profit in the current economic environment. The issue is not whether Australia’s banking future hangs in the balance, as much as it is about maintaining recent records in profitability and ensuring that 2012 will be another stellar year.

CBA, NAB and WBC paint a very similar picture. CBA had a record year in 2011 in terms of both earnings and profitability. Maintaining record profits is no easy task and in a changing environment steps need to be taken to manage costs, the largest of which is staff. Job cuts are likely for all Australian banks this year but this isn’t a warning sign of difficult times ahead, rather a move to maintain profitable balance sheets.

With the cost of funds on the rise, job cuts are predictable and shareholders and prospective shareholders should welcome these as a proactive move to ensure continued performance.